The nine years of historically low interest rates will continue in the wake of Fed Chairwoman Janet Yellen's decision to not hike rates – to not yet remove the proverbial punchbowl from the easy-money party.
It was a classic "50-50" proposition; it didn't seem likely the Fed would move to roil global markets, but given the perceived strength of the labor market, a hike wasn't out of the question.
Before Yellen decides to pull the trigger, we'll see price volatility spiral across all global markets – especially when it comes to crude.
So now the oil "doom and dread" crowd and their bearish predictions are running rampant.
Here's why they're dead wrong…
The Irrational Frenzy Surrounding the Fed's (In)Decision
Rarely has a decision (or lack thereof) by the U.S. Federal Reserve engendered such a frenzy among market analysts and investors.
But let's be honest here. Any eventual hike isn't likely to exceed 25 basis points (0.25%) and will be a stand-alone. This is hardly going to be the breach in the dam that results in a series of increases unfolding every month or so.
And bond markets have already factored this in, with rates across the board rising much beyond the projected Fed move.
Still, there is the emotional reaction to the hike, and that is certain to inject another bout of volatility.
This is a matter of concern for other markets…
Last week, I visited several European countries where many conversations I had touched upon the Fed decision. What's interesting to me is that most of my contacts would have preferred the Fed to just get it over with. A move on Thursday would have allowed the effect to occur and then markets to adjust.
Remember, as the United States prepares to leave central bank manipulation of fixed-income issuances, Europe, China, and others are embracing economic stimulus as well.
That contrast could exacerbate the market's reaction to any interest rate hike this year.
So what specifically does this mean for crude?
The Short-Term Effects of a Rate Hike on Oil Prices
The presumption is that a rise would put immediate pressure on crude oil prices by making purchases more expensive in foreign markets.
This is because a rise in rates results in dollar-denominated bonds becoming more attractive, thereby increasing the exchange value of dollars against other currencies.
And that's what will have the greatest initial impact on oil. Because the vast majority of oil sales worldwide are denominated in dollars, a rise in the dollar means it costs more in other currencies to buy a barrel of oil.
Conventional "wisdom" holds that this has an adverse impact on demand. All other things equal, there may be a change, even if short-lived.
However, the real effect on demand centers on what impact the rise in both the price of oil and the exchange value of the dollar will have on a range of economic matters…
It's Demand That Really Determines Long-Term Energy Prices
In this respect, the broader usage of energy (beyond simply that of oil) will be at issue. Market demand for all manner of energy will ultimately be determined by genuine demand, not by stimulated usage from lower prices.
After all, almost without exception, depressed prices (such as we've experienced in spades during the past several months) tend to increase the use of energy. And as energy becomes cheaper, end users increase consumption.
But the real impact will be felt across a broader range of commodities – metals, processed products, natural gas, even electricity traveling across borders.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.